FEATURE

Does proximity to Asia breed complacency for agricultural trade?

Mick Keogh and Adam Tomlinson, Australian Farm Institute

There has been a great deal of discussion during recent times about Australia’s proximity to Asia, and how the projected boom in Asian middle-class demand for food will bring major benefits for Australian agriculture. A common feature of any discussion of this issue by policy-makers is the fact that the projected boom in food demand will occur ‘in our region’ or ‘in Australia’s neighbourhood’, the inference being that it is inevitable that Australian agriculture has a competitive advantage in these markets due to geography. In effect, proximity to Asia seems to have encouraged complacency for agricultural trade.

The Asian Century White Paper, released by the Australian Government in October 2012, analyses the dynamics of Australian businesses dealing in Asian markets and discusses the major issues with trade negotiations in that region. The White Paper promotes the regional opportunities for Australia’s farmers but also acknowledges some weaknesses in the performance of the government in supporting the regional trade of Australian agricultural products.

Diplomats have historically been focused on developing and reporting on government-to-government relationships and agreements, rather than engaging with the industry. Without targeted collaborative support from the Australian Government for specific market access, Australian farmers are primarily competing against other export origins that have a more focused approach. For example, the US market access for beef to Korea is far superior to that of Australia. The White Paper indicates that facilitating market access for Australian agricultural products is a duty that needs to be added to the responsibilities of Australian diplomats. Critical trade issues to be addressed include tariff and technical trade barriers to agricultural trade, farm subsidies and export support subsidies, supply chain capabilities, market access and regional investment.

This article looks at the dynamics of Australia’s involvement in Asian markets and discusses developments in trade negotiations in the region.

The Asian region – an advantage for Australian exporters

Asia’s food and agriculture importers need to draw product from across the globe to fulfil their domestic demand. Australia’s geographical advantage to Asia translates into only a small advantage for Australian farm produce due to lower ocean freight costs (see Table 1) and presents only a limited advantage for Australian agricultural products accessing the Asian market. For beef and heavy grains, Australia’s freight advantage currently provides a premium of just 5%.

Table 1:    Ocean freight rates for beef and grains on route to North East Asia (March 2013 prices). 

  Ocean freight rate Australian freight advantage
Beef (chilled/frozen) to North East Asia A$/kg A$/kg
Australia  0.20  
US (Gulf)  0.44   0.24 
US (West Coast)  0.32 0.12 
Brazil 0.32   0.12
Argentina  0.39  0.19
Heavy grains (bulk) to North East Asia A$/tonne A$/tonne
Australia 21   
US (Gulf)  45 24 
Canada (East)  47  26
Sources:    Hamburg Sud, Landstar System Inc, International Grains Council, AFI analysis.

Despite the geographic advantage that Australian products hold in relation to the Asian market, Australia’s agricultural exports are not keeping up with the pace of Asia’s burgeoning import demands (see Figure 1). The key factors driving the increasing gap between the growth in Australian exports to Asia and expansion in Asia’s import demand are unfavourable currency exchange rates, high costs of production, difficulties in meeting consistent customer product demands and inventory management expectations, inadequate government trade negotiations and competition from an expanding Asian production base.

For much of the last decade, the Australian dollar has been trading at historically high levels due to the strong performance of the Australian economy and in particularly the terms of trade relative to countries such as the United States (US). The strong Australian dollar is markedly reducing the competitiveness of agricultural exports in the Asian market. The Australian dollar is currently 30% above the trade-weighted index long-term average for the period commencing December 1983 to present. According to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), current projections suggest that the elevated Australian currency exchange rate will remain for at least the next five years.

The strong Australian dollar has also come at a time of relatively low unemployment and significant increases in real wages. This effect is particularly pronounced in rural communities, with agricultural operations in competition with the mining sector for scarce employment resources. According to ABARES, agricultural sector employment has reduced by over 10% since 2010 while the mining sector employment has remained steady over the same period. The shortage of skilled workers in rural areas is making it increasingly challenging to produce cost-competitive agricultural products for export into Asian markets.

Figure 1
Figure 1:    Index of Australian agricultural exports to Asia and Asian agricultural imports.
Note:     e = preliminary estimates
Sources:     ABS, FAO, AFI analysis.

Another factor influencing the competitiveness of Australian agricultural exports to Asia is the shift in production required to specifically target the demands of the growing Asian consumer market. Importers in Asia, whether they are state-based authorities or private entities, have expressed an interest in working more closely with farmers and agribusinesses to create product supply lines that provide suitable attributes and flexibility. The acquisition of Australian cotton and sugar processing assets by Asian-based companies is a prime example of demand-orientated strategies looking to Australia for future supply of agricultural products. To capitalise on the growing demand for agricultural products in the Asian region, it is not only critical for Australian farmers to maintain product quality and safety, but also to focus production on the specific requirements being expressed by Asian importers. This may mean adjustments to or shifts away from traditional products and practices.

The extraordinary growth in the demand for agricultural imports into Asia has been led by the oilseed commodities such as soybeans and palm oil, with the demand for animal feed, meat production and processed food in many parts of the region underpinning this trend. The oilseed sector is the largest area in which Australia is currently unable to meet the growth in Asian demand, with Australia’s production of crops such as soybeans currently limited. Although Australia does not produce these key oilseed commodities at the scale demonstrated by countries such as the US, Brazil, and Indonesia, market access could be improved for alternatives where Australia is competitive, such as canola and cotton seed.

In March 2013, a long-standing ban on imports of Australian canola to China was lifted as a result of industry and government research and advocacy efforts. This development represents a significant boost for Australia’s canola farmers who in recent years have sold the majority of exports to European markets, and this development provides an example of the potential benefits of industry and government cooperation.

However, the intent of Asian nations to develop their own agriculture sectors to supply an increased share of projected future demand means that geographical proximity could increasingly represent less of an advantage to Australia. The emergence of India as the world’s largest beef exporter in 2012 and a net exporter of wheat should be sufficient warning of this likely development (see Figure 2). India has increased beef exports to over 20% of international trade and wheat to around 5% (from less than 1% historically) while Australian exports remain relatively static between 10% and 20% of world export volumes for both beef and wheat.

Figure 2
Figure 2:     World beef exports from major origins by volume.
Note:     MT CWE = Metric Tonne Carcass – Weight Equivalent
f = forecast

Sources:     USDA, AFI analysis.

Accessing key Asian markets – the main focus

China continues to represent the most significant opportunity for agricultural trade into the future. Australian Farm Institute researchers recently attended a presentation delivered by the BRIC (Brazil, Russia, India, and China) expert David Thomas, Director of Think Global Consulting, who highlighted the long-term opportunities for Australia’s trade with China. David suggests that the three major factors supporting China’s rise in power are people, land and money. China has the largest population in the world and is the third-largest land base. China is also expected to have the largest economy in the world by 2027, if not sooner. David presents the ambition, ‘Surf where the big waves are’, and supports the thesis that China is transforming from a country driven by cheap exports to one which is focused on domestic consumption.

The Think Global Consulting presentation also identified that food, energy and water will be the other key drivers for powerful economies into the future. Australia may not have the large population of China, India, US, Brazil and Russia, but at the national level, Australia does have land, money, food, energy and water. Capitalising on the population of ‘our region and Australia’s neighbourhood’ should be pushing the next generation of Australian farmers, and the government, to invest in developing a more competitive and rewarding agricultural industry into the future.

Critical to Australia’s future success in Asian markets will be agricultural trade arrangements negotiated between Australia and the nations in which agricultural import markets are emerging. To date, Australia has only had limited success in this regard, and lags well behind major competitors such as the US, Brazil and New Zealand.

The positioning of ‘Brand Australia’ in these emerging Asian markets is an immediate issue. Australia’s relatively high cost base makes it extremely difficult to compete purely on price. Future success in accessing these markets will depend heavily on the propensity of food processors and consumers to buy Australian produce due to its regional availability, physical quality, safety, and other credence qualities built into the supply chain. Coincidentally, this is also a critical issue in terms of the competitiveness of Australian farm produce in domestic markets. Australian agriculture has not promoted a unified national brand image, and this seems likely to make it more difficult for Australian produce to remain competitive in accessing these markets in the future as other nations forge ahead.

Australia’s ongoing trade negotiations

Australia is currently involved in negotiations associated with seven bilateral or regional trade agreements, as well as the ongoing negotiations associated with the Doha round of World Trade Organization (WTO) negotiations that commenced in November 2001. The free trade agreements (FTA) that are currently the subject of negotiations and the time those negotiations commenced are as follows;

China (2005)

The Gulf Cooperation Council (Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, United Arab Emirates) (2007)

Japan (2007)

Trans-Pacific Partnership members (Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, US, Vietnam) (2008)

Republic of Korea (2009)

India (2011)

Indonesia (2012).

Progress on reaching agreement in these negotiations appears to have been limited, although the media releases and publications discussing these negotiations are somewhat opaque and make it difficult to determine how much progress has actually been made. It is also noteworthy that many of the nations involved in this list are some of Australia’s major agricultural trading partners from the Asian region.

There are, however, a significant number of obstacles remaining that are slowing or preventing Australian farmers enjoying improved access to world, and in particular Asian agricultural markets. Inevitably it seems, negotiations become entangled in a wide range of technical matters that create impasses.

The Australia-Korea FTA negotiations are said to be close to reaching agreement, but the issue of Investor-State Dispute Settlement (ISDS) mechanisms has emerged as a major stumbling block. The inclusion of ISDS in the Australia-Korea FTA would mean investors in either country would have the right to initiate dispute settlement proceedings under international law against the foreign government involved in the agreement. For example, if that clause was included in the Australia-Korea FTA, a major international tobacco company in Korea could take the Australian Government to an international court, seeking legal redress for damage arising as a consequence of Australia’s plain paper cigarette packaging laws. Successive Australian Governments have not supported such provisions being included in FTAs. As a consequence of the failure to reach agreement, Australian beef exports to Korea are currently at a 5.3% tariff disadvantage compared to US beef exports, and that disadvantage will increase by 2.6% for every year that Australia fails to secure a free trade agreement.

Research by the Centre for International Economics in October 2012 (MLA 2013), indicates that the Australian beef industry will incur an initial loss in export returns in 2013 with market share falling due to the tariff differential. Assuming an Australia-Korea FTA does not enter into force (ie the tariff on Australian beef remains at 40%), this loss will be around A$182 million per annum (present value terms) by 2026.

A stumbling block in existing negotiations with both Japan and China is said to be demands for preferential resource access agreements from both these nations, and associated investment arrangements. Such demands are hardly surprising given both these nations are major purchasers of Australian mineral and energy resources, but providing preferential access to resources under a bilateral FTA would potentially be in breach of the ‘most favoured nation’ tariff requirements under the WTO.

Agriculture always the stumbling block in trade negotiations

It should also be noted that agricultural products are inevitably a stumbling block in any trade agreement negotiations, which is hardly surprising given that agriculture is regarded as the most trade-protected sector globally. Concerns about domestic food security have at different times been extremely important in both China and Japan, as are concerns that a flood of food imports from a nation like Australia will result in significant social turmoil in rural areas if farming becomes unprofitable. Notwithstanding, New Zealand (NZ) was able to secure an FTA with China in 2008, and as a consequence New Zealand products currently face import tariffs one-third those levied on equivalent Australian products – directly impacting Australia’s export competitiveness. For example the Chinese import tariff on NZ beef is 4%, compared to 12% imposed on Australian product.

Australia’s agricultural trade access with respect to Asia

There is a large degree of complacency in Australian agriculture that ‘if we grow it, Asia will consume it.’ This is a dangerously complacent attitude. Geographic proximity is not always an advantage, and Australia is now a high cost agricultural exporter, and generally unable to compete purely on price with developing nation exporters from South America or Eastern Europe.

To be successful in the emerging middle-class consumer markets of Asia, Australia will need to explain the particular benefits of Australian products that justify higher prices. This will require concerted efforts to promote the embedded characteristics of Australian products, as well as their quality. Characteristics such as food safety and disease freedom, lack of chemical contamination, high animal welfare standards, environmentally sustainable production systems, and high levels of worker safety and good employment conditions are all issues that will increasingly appeal to middle-class and wealthy consumers who can afford to pay higher prices, but they will not do so unless they are told about these features of Australian produce.

Normally the role of promoting these features of Australian produce would fall to the brand-name manufacturers exporting to these markets, but unfortunately that is generally not the case. Australian food manufacturers have suffered a sustained decline due to the high Australian dollar and highly competitive domestic markets, and much of the agricultural product exported is either raw or minimally processed commodities, destined for further processing overseas, rather than branded products.

This leads to a major question: whose role is it to promote the benefits of Australian agricultural produce in both domestic, but more importantly in international markets? Such promotion should, if successful, result in substantial public and industry good, suggesting the cost should be borne jointly by the agriculture sector and the wider community.

In some cases internationally, this is a role taken by government, and funded largely by taxpayers. It would be nice to have such a model operating in Australia, although given tight budgets, perhaps this is unlikely. An alternative that merits some industry discussion might be establishing an industry-wide promotion fund (possibly funded by an addition to existing industry levies) which could be matched by Australian Government contributions, and used to mount an effective and sustained generic campaign extolling the benefits of Australian agricultural products.

There is a likelihood, if such a campaign was successful it would also help to break down some of the entrenched opposition to granting Australian agricultural produce improved access to Asian markets. Having Asian consumers familiar with and appreciative of the quality of Australian produce could be of major benefit in breaking down some of the political barriers to improved export access.

References

Australian Government (2012), Australia in the Asian Century: White Paper, ACT, available at: http://asiancentury.dpmc.gov.au/

Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) (2013), Agricultural Commodities: March Quarter 2013, ACT, available at: http://www.daff.gov.au/abares/publications_remote_content/publication_series/australian_commodities

Meat & Livestock Australia (MLA) (2013), Industry News, Korea trade on the agenda (8 March 2013), available at: http://www.mla.com.au/News-and-resources/Industry-news/Korea-trade-on-the-agenda

Images:  Pedro Angelini, Francisco Anzola, Jennifer Wu

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